China Factory and Property Investment Rises 26.6 Percent in H1 2007

From the China Stats Office today:

From January to July, urban investment in fixed assets hit 5,669.8 billion yuan, a rise of 26.6 percent year-on-year. Of the total, state -owned and state controlled enterprises invested 2,431.7 billion yuan, surging 16.5 percent; real estate development enterprises valued at 1,213.5 billion yuan, rose by 28.9 percent.

In terms of jurisdiction of management, central investment stood at 533.2 billion yuan with growth rate of 15.4 percent as compared with previous year; that of local investment totaled 5,136.5 billion yuan, jumping 27.9 percent.

In terms of different industries, investments of primary, secondary, and tertiary industry amounted to 66.5, 2,549.8 and 3,053.6 billion yuan, expanding 46.2, 28.9 and 24.5 percent respectively, year-on-year.

In terms of different sectors, investments of mining and washing of coal stood at 76 billion yuan, a year-on-year rise of 17.2 percent; that of extraction of petroleum and natural gas grew to 94.7 billion yuan, increasing 10.4 percent; that of manufacture of non-metallic mineral products, smelting and pressing of ferrous metals, smelting and pressing of non-ferrous metals respectively valued at 139.3, 130.2 and 64.7 billion yuan, jumping 48.8, 9.2 and 34.8 percent; that of production and supply of electricity and heat, railway transport arrived at 399.4 and 77.6 billion yuan, climbing 12.6 and 5.4 percent year-on-year.

In terms of registration status, investments of domestic funds enterprises stood at 5,017.2 billion yuan, surging 26.7 percent over that in the same period last year; that of enterprises with funds from Hong Kong, Macao and Taiwan valued at 280.3 billion yuan, rising 34.4 percent; and that of foreign funded enterprises standing at 341.6 billion yuan, up 18.3 percent, year-on-year.

In terms of buildings under and new constructions, by the end of July, the cumulative number of urban construction projects over 500,000 yuan was 217,849, a year-on-year increase of 29,139; that of total investment planned in project under construction stood at 20.3484 trillion yuan, climbing 17.2 percent; that of number of project started this year valued at 132,099, a year-on-year rise of 17,168; that of total planned investment of newly projects was 4,813.8 billion yuan, a rise of 14.6 percent.

In terms of volume of positioned funds, investment in urban areas hit 6,610.4 billion yuan, a year-on-year rise of 25.1 percent. Of which, domestic loans, foreign investment, and self-rising funds rising 11.6, 16.0 and 31.0 percent respectively, year-on-year.

And just one detail, China will overtake the U.S. this year as the largest contributor to global growth, according to the IMF. The fund forecasts the nation will account for 15.6 percent of the expansion, versus 15.4 percent for the U.S.

China's Industrial Output, July 2007

China's industrial output rose 18 Percent in July.

China's industrial production grew 18 percent in July, slowing for the first time in three months after cuts to export incentives.

Output expanded less than June's 19.4 percent, the statistics bureau said today. China reduced export tax rebates on 2,831 types of products starting July 1.

The slowdown isn't likely to ease government concern that the world's fastest-growing major economy may be overheating. Inflation jumped in July to the highest rate in more than a decade and economists say a report tomorrow will show investment in factories and property is accelerating.

Here's the release from China Statistics:

In July, the value-added of the industrial enterprises that above designated size (all state-owned enterprises and non-state-owned enterprises with an annual sales income over 5 million yuan) increased 18.0 percent year-on-year. The sales ratio of industrial products was 98.42 percent, dropped 0.03 percentage point over the same month of last year. Industrial enterprises achieved a total export delivery value of 608.5 billion yuan, a year-on-year rise of 22.2 percent.

In terms of main sectors, the growth rate of manufacture of textile, raw chemical materials and chemical products, non-metallic mineral products, smelting and pressing of ferrous metals expanded respectively 15.8, 20.2, 22.7 and 18.8 percent; that of manufacture of general purpose machinery, transportation equipment manufacturing industry, electromechanical equipment manufacturing climbed 23.5, 26.6 and 23.2 percent correspondingly; that of manufacture of communication equipment, computers and other electric equipment increased 19.7 percent; and that of production and supply of electric power and heat power rose by 13.1 percent.

In terms of major industrial products, the output of coal and electricity respectively reached 196 million tons and 291.6 billion kilowatt-hours, increased 12.7 and 15.5 percent respectively. The output of crude oil was 15.47 million tons, dropped 1.7 percent year-on-year. The output of pig iron, crude steel and rolled steel stood at 39.67, 41.25 and 47.73 million tons, rose by 13.2, 14.5 and 23.9 percent respectively; that of cement was 117 million tons, up by 11.6 percent; that of automobiles was 679 thousand sets, up by 32.7 percent, of which, 386 thousand sets of cars with a growth of 27.9 percent over the same month of the previous year.

From January to July, the accumulated value-added of industrial enterprises above designated size achieved a year-on-year rise of 18.5 percent.

Chinese Retail Sales

From Bloomberg today:

China's Retail Sales Grow at Fastest Pace Since 2004

China's retail sales grew at the fastest pace in more than three years, buoyed by a stock market rally and higher wages and prices.

Spending climbed 16.4 percent to 699.8 billion yuan ($92 billion) in July from a year earlier, the National Bureau of Statistics said today, after gaining 16 percent in June. The figures aren't inflation-adjusted.

The biggest increase in consumer prices in a decade contributed to the acceleration. Stock-market gains and a 14 percent jump in urban incomes underpinned demand, aiding Premier Wen Jiabao's efforts to boost consumer spending and reduce the economy's dependence on exports and investment.

``Inflation played an important role in gains for food sales,'' said Paul Tang, chief economist at Bank of East Asia Ltd. in Hong Kong. ``But in other categories there's genuine continued gains, and overall growth is steady.''

Some Chinese retail stocks climbed. Youngor Group Co., the country's No. 1 maker of men's clothing by sales, gained 5.9 percent to 29.81 yuan after forecasting first-half profit more than tripled.

Meat, poultry and egg sales jumped 51 percent from a year earlier, the statistics bureau said. Jewelry spending rose 46 percent, automobile sales climbed 43 percent and those of furniture gained 32 percent.

Disposable urban incomes jumped 14.2 percent in the first half from a year earlier and earnings among rural households climbed 13.3 percent. McDonald's Corp., the world's biggest restaurant company, last week said it plans to raise salaries in China by 12 percent.

China will reduce a tax on interest income to 5 percent from 20 percent tomorrow, increasing returns on bank deposits to counter the effects of inflation.

China's economy, the world's fourth largest, grew 11.9 percent in the second quarter from a year earlier, the fastest pace in more than 12 years. Overseas sales jumped 34.2 percent in July.

And here's the data from China Statistics:

In July, the total retail sales of consumer goods reached 699.8 billion yuan, a year-on-year increase of 16.4 percent.

In terms of different regions, the retail sales of consumer goods in urban areas was 476.2 billion yuan, rose by 16.7 percent over the same period of the previous year; that of retail sales at and below the county level achieved 223.6 billion yuan, up by 15.8 percent.

In terms of different industries, the retail sales of wholesale and retail trades was 592.4 billion yuan, a year-on-year increase of 16.5 percent; that of lodging and catering services was 92.3 billion yuan, up by 18.0 percent; that of other industries was 15.1 billion yuan, up by 3.1 percent.

Inflation Creeps Up

Inflation in China is ticking up (as we can see from the chart below). In fact China’s inflation rate hit a ten-year high of 5.6 per cent in July, producing a spike which has raised expectations about further tightening measures as well as increased concerns there might be an eventual knock-on impact on the real economy.



On the other hand, as the Financial Times notes:

The rise in the consumer price index was mainly the result of higher food prices, a result of a shortage of staple meats, especially pork, following an illness which killed millions of pigs late last year, and higher feed costs.

So I think we need to be very careful before coming to any over hasty conclusions. If we look at the producer price situation for manufactured goods (see chart below), we find that, in July, the Producers’ Price Index (PPI) for manufactured goods up by 2.4 percent from the same month last year. At the same time the purchasing prices for raw material, fuels and power rose by 3.6 percent. So while there is cost pressure from inputs, there is no sign of these producing sustained inflationary upward pressure on producer prices yet.



So while the People’s Bank of China has been sounding more and more hawkish about inflation of late, and especially in its last quarterly monetary report, we still need to wait and see to what extent this passes through to monetary tightening, and even in the event that it does, to what extent - given the overarching liquidity background - to what extent this passes through to impacts on the real economy.

I cannot help feeling that what is going on in the financial markets and the international banking sector right now will be much more significant for determining the future Chinese growth path.

IMF Urges China To Raise Rates More

The International Monetary Fund has warned China about the dangers of over-investment in sectors such as construction and property and recommended further monetary tightening following the small rise in interest rates imposed by the central bank last week:

Wanda Tseng, deputy director of the IMF’s Asia and Pacific department, praised the Chinese authorities for reacting “relatively early” to the problem but described the rate increases – which included a rise of 27 basis points to 5.85 per cent for the one-year benchmark rate – as “very small” and “probably just symbolic”.


The IMF report forecasts Asia-Pacific economic growth of 7 per cent this year. That would be the same as in 2005 but higher than the 6 per cent predicted by the previous report in August last year, partly because of the recovery of Japan and a continuing surge in international demand for electronic products made in Asia.

However, the IMF warned of several risks to Asian economies, including the effect of high oil prices, which have so far had only a moderate impact on the region. The report also said Asian financial markets would probably be “tested” as global liquidity conditions tighten.

Other dangers included a possible avian influenza pandemic among humans and the chance of a sharp slowdown in US demand caused by a disorderly unwinding of global current account imbalances. Although Asian domestic demand has improved, Ms Tseng warned: “Asia is still very dependent on external demand in the advanced countries.”

Current account surpluses are already diminishing in most Asian countries, in part because of higher oil import bills and the transfer of the surpluses to oil exporters. In India and east Asia, excluding Japan and China, the aggregate surplus is expected to fall to less than 3 per cent of gross domestic product this year, about half the level of 2004.

But in China, the IMF said, the current account surplus was likely to remain at 7 per cent of GDP this year after more than doubling in 2005. While rejecting calls from US politicians for a dramatic 20-50 per cent one-off revaluation of the renminbi, IMF officials such as Ms Tseng are urging Beijing to use its new exchange rate system more “flexibly”. In current conditions, that would mean allowing a faster appreciation of the renminbi against the US dollar.

The report, which covers the Asia-Pacific from India to New Zealand, could fuel concerns about the competitiveness of some south-east Asian economies.

Although foreign direct investment there has been sustained by manufacturers’ desire to avoid over-dependence on China, investors are more concerned even than they were before the 1997 financial crisis about corporate governance, corruption and political stability.

China Raises Interest Rates

The Chinese leadership obviously feel that the continued growth of fixed capital spending needs reigning in more and has today raised interest rates by 0.27 per cent, from 5.58 per cent to 5.85 per cent.

The rate rise, the first by the People’s Bank of China since October 2004, surprised the markets, which had expected Beijing to use a combination of administrative measures and higher reserve requirements for banks to rein in credit growth.

“We believe the central bank is trying to send a strong signal that the authorities mean business when it comes to controlling overheating in the economy and over-investment,” said Stephen Green, of Standard Chartered Bank, in Shanghai.

The government did not lift deposit rates, a decision which is aimed at minimising incentives for Chinese to leave their money idle in the banks rather than spending it.

The decision to lift only the cost of borrowing money also gives local banks a higher interest rates spread, meaning they can preserve their profitability even if they are forced to rein in the quantity of lending.

“Chinese banks make most of their money through their net interest margin,” said Arthur Kroeber, of China Economic Quarterly in Beijing.

The High Price of Feeding the Hungry Dragon

Mark Thirlwell, who is director of the international economy programme at the Lowy Institute for International Policy has an interesting piece in the FT today on China's commoditity appetite and how this is changing the shape of the global economy. I posted something on this on Bonobo Land some weeks ago.

Resource-rich economies around the globe have been busy counting their swelling foreign exchange receipts as their leaders consider how best to blow their rocketing tax revenues. The Middle East is awash in petrodollars, government coffers in Latin America and the Caribbean have been swollen by bumper earnings from oil, coffee and copper exports and sub-Saharan African producers are experiencing a welcome boost. Australia, meanwhile, is enjoying a resource bonanza that has lifted its stock market to record levels.

Soaring world prices for oil, gas, base metals and agricultural products have prompted speculation about a commodity supercycle that could last two decades, and this latest resource boom is bringing with it all the usual benefits and pitfalls. But it is also presenting policymakers in commodity exporting countries with a new challenge, one that relates to a key driver of the current cycle. While factors such as low real interest rates and concerns about security of supply have helped drive up prices, demand from China has probably played the most important role.

Take the case of metals and minerals. Last year, China accounted for almost half of the world’s consumption of metallurgical coal, over 40 per cent of thermal coal and iron ore consumption, and more than 20 per cent of steel, aluminium, copper and zinc consumption. The demand triggered by its industrialisation and urbanisation projects turned China into a big influence on commodity prices.

It is now widely recognised that China’s expanding economic weight is exerting a gravitational pull on countries in its neighbourhood, reshaping regional trade flows and institutions. One consequence of its immense appetite for commodities is that China is also pulling economies from further afield into its economic and political orbit. Bilateral economic relations with resource exporters worldwide are blossoming: Chinese companies are investing in Sudan, Angola and Nigeria; and China is now a big export market for Chile, Peru, Argentina and Brazil.

While feeding the hungry dragon is an economically rewarding experience, it adds a new diplomatic and strategic element to the macroeconomic policy issues involved in managing a resource boom. Australia’s experience as a significant commodity exporter and a close ally of the US provides a particularly interesting example both of the benefits involved in a deepening bilateral economic relationship with Beijing and the challenges that come with it.

The positive side of the balance sheet is impressive. China is now Australia’s second largest trading partner, and the complementarity between the two economies means that China’s rise has represented a huge economic windfall for Australia. Export prices have surged on the back of resource demand, even as Chinese production has helped hold down the price of manufactured imports. The Reserve Bank of Australia’s nominal commodity price index is at its highest ever level, and Australians are enjoying the biggest cumulative rise in the terms of trade since the early 1970s. The income boost has helped underwrite a record 15-year long expansion, a stock market boom and an unemployment rate currently at a 30-year low. That same complementarity, however, means that national prosperity is increasingly dependent on the growing power to the north. True, this is not the first time the “lucky country” has surfed its way to prosperity on a regional development wave. Economic take-off in Japan and South Korea were earlier east Asian boosts to Australian growth. But the relationship with Beijing injects a strategic element that was much more muted in the relationships with Tokyo and Seoul. Japan and South Korea were, like Australia, US allies, and neither had realistic ambitions to superpower status. China is different in both respects and Beijing has not been shy in linking economic ties with broader strategic objectives.

One example came last month, when China started to play hardball in negotiations over the contract price of iron ore. At one stage China reportedly threatened to impose a price cap on imports, prompting Australian protests. While that threat has now receded, the recent visit by Premier Wen Jiabao provided China with another opportunity to remind Canberra politely of the broader point: while Australians might think resource contracts are a matter for businesses, that is not a view shared by Beijing.

China is seeking to leverage its growing weight as a consumer to secure a more favourable price and Beijing is applying the same principle – using its economic power to win a better deal – in bilateral relations more generally. Canberra has learnt to play the game. Australia granted China market economy status as a precursor to free trade agreement negotiations and has pleased Beijing by announcing a deal to sell China uranium. Australia’s foreign policy stance is being influenced. Canberra has indicated that it will no longer automatically take its US ally’s side on issues where Washington and Beijing differ, from exchange rate policy to Taiwan. Even public analysis of last month’s visit by Condoleezza Rice, US secretary of state, focused in part on whether the security dialogue it entailed might unduly offend Beijing.

China’s economic rise has been good news for the world’s commodity exporters. But as Australia’s experience demonstrates, they should not make the mistake of thinking that the resulting bilateral relationship will be confined to taking Beijing’s money and shipping product. China has great power aspirations and superpowers, even prospective ones, tend to view their relationships with suppliers in a much broader perspective than in purely commercial terms. Just ask Washington about its dealings with Middle East oil suppliers.